How to structure an MLM company legally in India. Process, Compliance, Best practices and Relevant law.

In this article, Rituraj Singh Bhati who is currently pursuing M.A. IN BUSINESS LAWS, from NUJS, Kolkata, discusses how to structure an MLM company legally in India. Process, Compliance, Best practiceS and Relevant law.

MLM: ‘Multi-level Marketing’ strategy is also known as ‘network marketing, pyramid selling and referral marketing’ in different marketing cultures across the globe except China where MLM has been declared illegal. Similarly, a practice known as pyramid scheme is banned in various countries.

MLM is a strategy which has been in knowledge of Indians since late 70’s; the history of MLM has been a disputed area of discussion, though some links of MLM working as late as 1886 by the name of Avon which is a successfully running company even in today’s scenario  MLM companies have always been a matter of dispute around the globe because of the typical work plan according to the strategy; numerous countries are planning or have planned to declare pyramid schemes as an illegal entity because most of the companies mis-use the contacts and revenue attained due to vast working of the multi-level marketing and in most of the situations the companies work on pyramid schemes and give it a name of multi-level marketing company.

• It is a global confusion that, the pyramid scheme is wrongly misunderstood or is confused as MLM Company because of their similar work strategy and hierarchy system. These kinds of pyramid scheme selling companies start off very well and provide the down line with the profits they have earned by recruiting new recruits below them (known and further referred as “down lines”) but after a certain time when the owners of the companies think that they have made enough money to handle the fraud by bribing government officials and authorities they all of sudden withdraw the money which is in circulation of the market and flee; that’s the major reason why China has declared pyramid scheming groups as illegal and various other countries also have strong laws regarding pyramid scheming groups.
• Multi-level marketing is an easy and cheap form of marketing practiced by the companies, in this particular form of marketing the company does not even needs to hire the representatives, employees etc. the people working under multi-level marketing companies are not contractual employees of the company, they are just another “down line” accrued by their successor “down line”.
• The name itself specifies the working of the multi-level marketing companies, where a scheme is launched by a person and he further makes members under him and promises them a certain amount of profit on percentage basis on the sale of a certain product or scheme and the members accrued by him further will accrue people under them promising them the profit percentage, in the same manner, it was promised to them on sale of certain product or scheme and so on the list of members keeps on increasing as every member of the chain wants to earn extra profit by the means of percentage of goods or services sold by their down line.
• On accruing or on addition of every “down line” the person accruing the new “down line” gets paid as well as the person who has accrued the person above him (predecessor “down line”) also gets paid, in the same manner every person associated with the multi-level marketing company earns reward on every single addition in the chain and further sales.
• Supposedly there is a chain (Z) which has 5 members already accrued to it as links, say (A, B, C, D, E) now let’s assume that A linked B, B linked C, C linked D & D linked E); if ‘E’ brings or adds a new “down line” ‘F’ to the chain he will get rewarded to add ‘F’ to the chain and in return A, B, C, D & E will also get a share in the reward because due to ‘A’ ‘E’ was able to link ‘F’ to the chain. These companies work on the principle of ‘link by link addition’ strategy which says that if ‘A’ had not made ‘B’ a down line; it would not be possible for ‘E’ to link ‘F’ to the chain because would also not be a part of the chain.
• The strategy allows every person to attain profit by every addition in the chain. By this sole formula the multi-level marketing companies hold multi million dollars market in every single country except China. The multi-level marketing company’s strategy also clarifies that the person sitting on the higher link of the chain earn higher level of margins than the people who have just joined the chain as the person sitting of the higher link of the chain naturally has more down links which are joined after him.
• Likewise, the people linked to the multi-level marketing company are not a job-holder in the company and they do not obtain or receive any pay from the company itself; they derive their profits from the amount generated by the Multi-level Marketing structure; plus point of this non-employment/ non-payment policy is that the “down lines” are not protected by employment laws of the land they are instead cited and staged as “independent contractors” working on their own account without burdening the company under several liabilities. Though such a liability free structure multi-level marketing companies frequently face law suits and criticism all across the globe.

Some of the major MLM players in India are

1. Oriflame,
2. Herbalife,
3. Amway,
4. Hindustan Unilever,
5. Tupperware

The basic working strategy of a MLM Company is shown below by the medium of a chart

Process of structuring an MLM company

Setting up a Multi-level Marketing company in India is fairly legal and easy to setup. The basic requirements to structure a legal and permissible Multi-level Marketing Company in India are:

1. It should be a direct selling Entity with acquired licences as per the law of the land where the business would prevail. The licences to be obtained are PAN number, TIN number, CIN Registration number, labour Licence and a bank account in a Nationalized Bank of India.
2. The person starting a Multi-level Marketing Company should make the company’s status and structure clear by the way of MOA (Memorandum of Association) and/or in the partnership deed. Nature of business should be specified by the documents of the company.
3. It should clearly mention and formulate the rate of incentives and profits to be distributed to the independent contractors/down lines and also the time limit within which the company should pay their share of incentives.
4. The company should have an official website which clearly shows its total information and even shows the names of the authorized direct sellers appointed by the Company and their Personal Identification Numbers.
5. The Company should have an independent department handling the Consumer Grief within 7 days of such grievances get registered. Consumer Complaint registration should be easy and straightforward.

The process of incorporating a Multi-level Marketing Company involves following Heads/Steps

• In a Multi-level Marketing Company a director has a very limited risk as the numbers of people employed are very less and the down lines added by the front lines are independent contractors and hold no liability against the company neither does the company has any liability against them.
• A person planning to structure a Multi-level Marketing Company should emphasise upon his legal framework to meet up the upcoming circumstances. The deed of the MLM should clearly show the nature of the business. And in addition there should be adequate policies relating to the relation between the company and the direct seller / direct seller and the consumer/product return policy/product return policy/termination of the business policy etc.
• The most important stages in the process to structure and launch a Multi-level Marketing Company is: Product, Launching, and Human Resource.

1. Firstly, the product should be tested and should be able to attract people at mass. The products already sold by a company older than your company will not be sold until and unless they excel in Quality or in Quantity when compared to the established company’s product. Product should be unique and useful.
2. Secondly, the launching and the branding of the product should be such that it attracts customers and the person using the product should come in persistently as a permanent user of the product.
3. Thirdly and most importantly the HR of the company should be very strong and into the root level of public. This is the most important media to everything while processing a Multi-level Marketing Company. The whole and sole work of such companies is related to human chains and direct marketing and selling.

BEST PRACTICES IN MLM STRUCTURE

Practices related to MLM structuring are

Matrix MLM Plan

• Matrix MLM plan is a different plan than the others as it consists of limited income and member increase out of an unlimited entity of down line and product sales. Under this plan a fully loaded setup will connect your company with less than 4,000 people as links and their business thereon. As to the present scenario there are numerous of top leaders associated with chains a hundred times elaborate than the one provided by this matrix plan. It narrows an unlimited opportunity into a limited income interest.
• The matrix MLM plan operates on spill over principle, which is a major asset to this particular form. The spill over principle states that on achievement of certain number of the member in a significant level the next down line members will automatically fall under the next level and so on; it saves the company as well as members from the paralleling of big players and small players on the same level. It allows you to fill the generation lines of your structure and even the generation lines of the distributors linked with the members.
• Another plus point of the matrix plan is that it can be handled easily as the front line never exceeds 2 to 3 members and so on every further link. It is also a constantly position changing plan according to its needs related to the project. The managers and the authorities are hired, managed, replaced with every such new project.

Binary MLM Plan:

• Binary plan as the name itself suggests is based upon the binary number of members in the links and the next spill over. The plan revolves around the number ‘two’ as soon as the link reaches a total of two members the plan spills over to the next row narrowing the level of single line members to two. Though being only two members in a level the structure provides supportive environment to the newbies as they are directly associated to their seniors with a human ratio of 1:1. The very strength of the binary plan is its support to every level of the business environment.
• Working under a binary MLM plan you can link 2 members with each binary level as business centers where they can derive profit multiplied by ‘n’ (also known as 2 x n plan, where ‘n’ denotes infinity). Therefore, there is no limit in the binary plan for the amount of business centers to be developed under two people utmost. With this calculation, each business center has a limited payout capacity which allows both the company and the distributors to earn profit.

Stair Step Break Away MLM Plan

• Under stair step break away MLM plan as the name suggests that a distributor does progression bit by bit (like a ‘stair step’) in his distributorship and when he attains a certain level of targets he can ‘break away’ from the upline distributors to form and facilitate their own   association/circle/business from then on independently. Breaking up with the upline distributors allows the newly independent organization to accrue a better and larger amount of commission. Under this plan every distributor has a limit to sponsor only a single level of front line distributors; here there is a limit bounded to the level of the distributor but not to the width of the front line distributors a distributor can sponsor. Thus, in this plan a distributor can sponsor ‘n’ number of front line distributors with a condition that they shall be on the same level at the time of sponsorship.
• This plan is the most constructive plan to attain the main goal of the business that is to sell the highest possible stock product of the parent company. The plan allows the distributor to link as many frontline distributors as he can; who even personally consume as well as sell further the products of the company they are associated with.
• In this plan a front line distributor’s direct competition after establishment is from the cross line distributors as well as the up line distributor from whose link the distributor had broken away.

Unilevel MLM Plan

• The Unilevel MLM plan is somewhat similar to the stair step break away plan discussed above. This plan also allows you to sponsor a single line of distributors and similarly there is no limitation set upon you regarding the width of the line you want to sponsor unless and until a single line is sponsored. This plan is best for forming enormous chains with huge amounts of links connected to them.
• As the name suggests a Unilevel plan is only elaborate to a single level and therefore is very easy to be understood by everyone whether be a part-timer distributor of a full time distributor. With the ease to understand the plan it is in turn easy to explain it to the consumers.
• This is the best and most suitable plan to be adopted by a start-up MLM Company where the easement involved with the plan helps the first timer distributors and the customers.

Board MLM Plan

1. The board income plan is a rare and high yielding plan consisting of different numbers of board members as per the company’s will; the board can consist of 3,5 or 9 members as per needed. One of the members will be specified regarding the commission each and every time the entries of the board are completed.
2. The board members in addition to the income from the board can accrue bonuses, referral commission etc.

Types of board plans,

1. Single board,
2. Multi board,
3. Shuffling board,
4. Auto filling board,
5. Manual filling board.

Board MLM plan is also known as revolving matrix multi-level marketing plan.

Hybrid Unilevel MLM Plan

The said plan was devised quite recently in 1985. The plan is fairly complex as well as high paying to the new recruits which is a better scenario to keep the recruit associated with the company and earn extra profit with the help of such recruits which is unlimited. In this particular plan the sales leaders are absent and everyone is considered to be a distributor. The formula of earning profit from this plan is

Profit = Distributors below you (x) Number of levels below you.

• Plus, you get paid with the commission according to your position amongst the distributors in the down line; the more of the time you are linked in the down line the higher will be your level among the distributors, and you will be paid significantly higher than a new distributor who has joined after you. Sponsors also do not lose their potential good yearning distributors as break away. As there is no option to break away the sponsors can generate continuous profits from the distributors under them on the average percentage of commission paid to them.
• Through this plan a distributor earns a higher profit for a period of 30-60 days but the sponsor sitting in the company earns the higher profits for the entire duration of the working of the distributor with the company.

Generation MLM Plan

• Amongst the other MLM plans the generation MLM plan is considered to be the most important as well as the most typical plan; the plan provides numerous of attributes for which it is considered to be the most important of all by the newbies as well as settled sponsors.
• The system of working of this plan is typical to understand; it generally functions like a Unilevel MLM Plan, except instead of getting paid off the level you get paid on generations. A generation consists of the entire volume below you to the next person below your down line; the volume index travels higher to lower limits i.e. up line to down line which covers the higher ranking as well as lower ranking distributors than you.
• The generation plan requires expertize as well as accuracy to get running. The plan is typical and resultantly is even more complex to explain to the end user.

Gift MLM Plan

• Easiest way to earn money with lowest possible risk involved. It can be said as a shortcut to earn wealth and prosperity. The plan is also referred to as donation plan or charity plan.
• The plan works as a first donate than wait for it to rotate scheme; here a person first has to donate keeping aside the self-centred act and in turn he gets eligible to receive gifts from other members. This is not a Multi-level marketing plan it is a general gesture where you give one and get eligible to receive many.

Relevant Laws

Kerala is the first state in India to enforce MLM guidelines binding the procedure and process of structuring and running an MLM. Even the Rajasthan Government has issued guidelines as to Direct Selling.

The people having any grievance from an MLM company would be deemed to be heard and concluded by the consumer forums under The Consumer Protection Act, 1986, as the people buying the products from the direct sellers also fall under the classification of a consumer.

The general guidelines top established MLM emphasize upon:

1. The company should be a Private Limited or Public Limited Company.
2. The Company should mandatorily have TIN, DIN for Directors, PAN, MOA and MOM, Sale taxes paid to the government, IT returns, TDS etc.
3. Bank account in a nationalized bank.
4. Company shall not pay incentives upon admission of a new member.
5. MRP of the goods shall be visible clearly.
6. The product to be sold by the company shall comply with all the regulations made by the principle act to which the good is related.

India may not have laws guiding setup and running up of an MLM but it has certain law against MLMs. The law is mentioned as under:

• Money circulation schemes are banned under “Prize Chits and Money Circulation Schemes (banning) act, 1978.”
• India has taken up the steps to form guidelines for MLM; a bill was issued in 2005 but still, is not passed by the houses of parliaments.

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